Med tech VC investing remains sluggish; biotech surges

Venture capital investment in medical device companies declined slightly during the 2013 second-quarter, even as it soared significantly for biotechnology and many other industries.

Investors pumped $543 million into 71 med tech deals during the quarter, according to the National Venture Capital Association and PriceWaterhouseCoopers' quarterly MoneyTree report (based on Thomson Reuters data). That reflects a 1% decline in both dollars and deals over the previous quarter.

On the positive side, the decline is much better than the 20% drop in deal value and 10% decline in deal numbers in the 2013 first quarter, itself following months of investment declines. But it stands in stark contrast to the biotechnology industry's surge. During the second quarter, biotech companies drew in $1.3 billion for 103 deals, an astounding 41% increase in dollars and a 4% jump in deals compared to the previous quarter. True, that jump comes from two large funding rounds, but it is on top of a boom that began a few months ago in biotechnology-related IPOs.

Of course, there's no boom to be seen in med-tech-related investing or companies in the sector going public. That's the bigger question to be addressed here, why med tech hasn't seen improved investor interest, said Gary Kurtzman, a managing director with Pennsylvania-based investment firm Safeguard Scientifics.

Kurtzman, whose firm invests heavily in med tech and healthcare IT companies, told FierceMedicalDevices that he sees biotech surging because its investors have an exit: Pharmaceutical companies increasingly want to buy promising new drugs under development. That perception has encouraged investors, after a long drought, to sink more money into biotechnology startups at various stages, and has spurred the resurgence in biotech IPOs, he said.

Med tech has remained in a slump for a number of reasons. Because the turnaround for medical devices and diagnostics to reach the marketplace is shorter, those companies are heavily focused on issues such as insurance reimbursement. While FDA approval times are getting better, health care reform has placed greater focus on products that can help reduce health care costs. In this environment, companies can't guarantee their new devices or diagnostics will win insurance coverage and produce revenue, so investors are still shying away, Kurtzman said.

"Products can get approved, but now you can't get paid for it," Kurtzman said. "This is what is really discouraging the investment in that space. It is pushing people away."

Kurtzman added he sees med tech investment improving eventually, if biotechnology improvements continue--kind of a coattail effect. But insurance reimbursement challenges could delay better times for a while.

"Everything goes in cycles," he said. But "until we have more predictability about the path we get paid, it is going to be more challenging."